Bermuda: Government Compromises On Payroll Tax

Mairi Mallon, Royal Gazette

19 February 2001

This story is reproduced by kind permission of the Royal Gazette at http://www.accessbda.bm

The amount of payroll tax collected by the Government is to go up by nine per cent - with big International businesses not getting the break they had hoped for.

In what the Government sees as a compromise, high earners in both the local and international fields are going to pay less tax, and the total collected is expected to be $178.6 million.

But the self-employed - such as architects, physicians, lawyers, dentists, surveyors, engineers and taxi-operators - will see a rise in their tax bills which will raise an extra $3 million for Government.

The overall payroll tax has remained unchanged, and will stay at 12.75 percent, but taxi drivers will now have to pay a $1,500 flat fee each year.

International business reacted angrily after last years' Budget, when Government increased their payroll tax bill by between 30 and 100 percent, raising $12 million more than expected.

Minister Eugene Cox had said at the time that a change to the way the tax was collected last year was expected to be revenue neutral.

But the increase of the nominal cap (a figure which allows a company to take a set figure as if it were the salary of an employee) to $250,000 had the unexpected effect of raising millions of dollars extra for the Government.

International companies had hoped that the tax would be taken back to pre-2000 budget rates.

But yesterday Mr. Cox only marginally reduced this nominal to $225,000, and imposed it also for employees of local companies.

In effect this means that someone earning $1.5 million a year will only be taxed on a nominal figure of $225,000, in both local and international companies.

Mr. Cox told the House of Assembly: " Last year, the Government introduced a number of modifications in order to provide relief to small businesses and to remove the option for exempted companies to pay the Payroll Tax on the basis of `assumed' remuneration.

"The objective of these changes was to improve the equity of the overall tax system. These modifications will remain in place, except for a reduction in the cap of $250,000 on an individual's remuneration declaration to $225,000."

He said that this would make the system more fair to international companies.

He said: "It was estimated a year ago that setting the cap at $250,000 would limit the impact of removing the `assumed' remuneration option on total tax paid by exempted companies. Lowering the cap to $225,000 will help to establish a lower - but more equitable - equilibrium point for exempted companies in respect of the Payroll Tax."

He said extending the cap to local companies would go one step further into blurring the distinction between local and international companies.

Mr. Cox said: "This further adjustment reinforces Bermuda's position as a jurisdiction that taxes local and international companies on generally the same basis. Both local and international companies compete for local resources under similar market conditions, and therefore it is appropriate that they should be taxed on the same basis so as not to introduce tax advantages for either group."

Mr. Cox explained that investigations had proved that the nominal cap for the self-employed showed that some groups who pay on the basis of notional remuneration make a disproportionately low contribution to the total tax yield.

He said: "These groups include architects, physicians, lawyers, dentists, surveyors, engineers and taxi operators. In recent years, the gap between actual remuneration and notional remuneration has been widening with the result of reducing the optimum yield from the Payroll Tax.

"The review of the notional base that is underway will lead to a change in the way the Payroll Tax is applied to self-employed professionals. This is expected to generate additional revenue of $3 million."

He said that currently, the reported average annual notional remuneration for this group of taxpayers is about $70,000 in contrast to an actual market range of $100,000 to $150,000 for salaried professionals in the private sector.

He said: "Using comparable market compensation as the basis for the Payroll Tax will also improve equity."

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